Sometimes one of the challenging costs to estimate is the exposure from warranty programs.  However, just because it’s challenging doesn’t mean that it can be ignored.  If anything, it can mean that it warrants close attention.

But, close attention doesn’t necessarily mean that it requires a lot of work.  The key can be how you setup your data.

Your starting point will be developing a good history for tracking your warranty expense, so first capture your expenses by time period.  However, there’s also a second dimension to it.  You also want to capture them by the period that the expense is related to.  So, in other words, you could have a two dimensional grid.  Going down could be a period that the original sales pertained to.  Going across can be the number of months out since the sale was made.

Laying it out in this fashion can help you see a pattern on the timing and the level of the warranty cost.

To do the next step, take a copy of what you just did and put it below or put it in a new sheet in your file.  With this copy you track the percentages.  Calculate the percentage of warranty expense pertaining to sales.  You should see some interesting numbers with the percentages over time.  Hopefully, you’ll see some wind down over time and the percentages could help give you a basis for estimating what your future warranty expense would be. 

Then there will be another snapshot and this one will be where you project the future warranty expense that has not yet occurred.  You can use the percentages from your history as a guide. 

Then there’s a fourth spreadsheet and this will be the dollars projected, which would be multiplying the percentage estimate that you created times the dollars that you had just projected that can be used on to come up with your warranty expense.

So follow this approach and you can take an area that could be tough, warranty, and turn it into something that’s much easier to calculate.  Keep on top of the number, not only for accounting, but also for operational purposes.